California marijuana market readies for ‘robust’ new era

One day soon, a licensed medical marijuana farmer in Humboldt County, pictured in July, may harvest a crop and then contract with a registered delivery driver to bring buds to a state-sanctioned cannabis distributor in San Francisco.
Paul Kitagaki Jr.
pkitagaki@sacbee.com

One day soon, a licensed medical marijuana farmer in Humboldt County, pictured in July, may harvest a crop and then contract with a registered delivery driver to bring buds to a state-sanctioned cannabis distributor in San Francisco.
Paul Kitagaki Jr.
pkitagaki@sacbee.com

A new world of weed is coming to the largest marijuana marketplace on the planet.

Gov. Jerry Brown this month signed regulations he said would bring “robust controls” to govern California’s long untamed medical marijuana industry, with clear standards for “local government, law enforcement, businesses, patients and health providers.”

His signature also may bring something else: a decidedly robust new era for cannabis commerce. By 2018 or sooner, marijuana businesses – from small pot farms to cannabis superstores – effectively can begin earning legal profits under the nation’s most diverse state licensing scheme for pot.

Until now, California’s vast pot economy has flourished with nebulous state guidelines enacted by lawmakers after voters in 1996 approved Proposition 215 to legalize marijuana for medical use. Purportedly nonprofit medical marijuana providers currently take in millions of dollars under a legal notion of patients cultivating and sharing cannabis in collectives with other medical users.

Sign Up and Save

Now marijuana is set to be a regulated business activity, governed as a unique agricultural product in an industry that will be transparent and, soon, unabashedly for-profit.

Medical marijuana dispensaries annually ring up more than $1 billion in sales, and about 1 million Californians now have physicians’ recommendations for pot use to address a range of conditions, including nerve pain, cancer and anxiety. With a ballot initiative to legalize adult recreational pot use looming for 2016, investors are poised to get in on this new era of marijuana regulation.

“You’re going to see the emergence of a California medical marijuana commodities market,” said Sebastopol attorney Omar Figueroa, who represents marijuana dispensaries and venture capitalists. “Investors will be coming in and betting on the future price of marijuana. There is going to be a full-blown marijuana casino.”

Steve DeAngelo, executive director of Oakland’s Harborside Health Center medical marijuana dispensary, said the new rules signal that “we’re going to move from a nonprofit service model to a for-profit service model.”

Harborside, which already bills its Oakland dispensary as the largest marijuana provider in the world, has a second dispensary in San Jose and plans for a third in San Leandro. DeAngelo also heads a national marijuana industry investment group, Arc View, that envisions new opportunities in California as “medical marijuana companies and stores begin to look a lot like other businesses.”

But if regulated marijuana commerce is indeed California’s next burgeoning business sector, it remains to be seen who gets to play and where.

“I’m a little wistful,” Figueroa said. “There was romanticism in the peaceful cannabis growers rebelling against conformity. Now the suits are coming in and taking over.”

California’s pot governance, to be headed by a yet-to-be-staffed Bureau of Medical Marijuana Regulation, will be funded by $10 million loaned by the state and repaid in still-to-be specified taxes and fees on cannabis businesses.

Detailed regulations are to be drafted and implemented between now and Jan. 1, 2018. In addition to the new Bureau of Medical Marijuana Regulation, state agencies on public health, taxation, consumer affairs, water, fish and wildlife and pesticide control all will play a part in regulating cannabis. In addition, 58 counties and 482 cities will decide on local rules, including whether to accept or ban pot businesses.

The three medical marijuana regulation bills signed by Brown – Assembly bills 266 and 243 and Senate Bill 643 – will create 17 different marijuana business licenses. There will be 10 licensing and fee tiers for pot cultivation alone, two licenses for manufacturing, one for laboratory testing, two for retail sales and one each for transportation and distribution.

From seed to sale

The market structure that California is attempting to implement is far different from that of Colorado, which in 2010 became the first state to impose strict medical cannabis regulations. Under the Colorado model, now expanded to include recreational marijuana, licensed stores largely grow their own pot in cavernous state-inspected warehouses or buy product from other licensed retailers in an integrated production system. Would-be independent marijuana farmers were effectively frozen out.

As its rules are formalized over the next two years, California seeks a sweeping approach to open the entire marijuana supply line for businesses large and small – and to regulate each step in the journey from pot seed to pot sale. The system takes inspiration from alcohol rules that create separate licenses for producers, distributors and retailers to prevent big players from colluding or dominating the market.

So, one day soon, a licensed medical marijuana farmer in the backwoods of Humboldt County may harvest a crop and then contract with a registered delivery driver to bring buds to a state-sanctioned cannabis distributor in San Francisco. The distributor then might send samples to a licensed testing lab in Oakland and later ship product to a state-inspected cannabis foods kitchen in Berkeley and a regulated marijuana store in Los Angeles.

Under the California legislation, the Department of Food and Agriculture and the new marijuana regulation bureau are to construct a “track and trace program” to govern the movement of pot throughout the distribution chain.

“I think we’re going to see a bit of culture shock, just like transitioning California from the Wild West to statehood,” said Dale Sky Jones, executive chancellor of Oaksterdam University, a cannabis institute in Oakland. “With regulation comes things like inspections and measuring and fees and audits. And from that, hopefully, structure and confidence.”

In California’s north coast pot-growing region, home to a long illicit cannabis culture, the new rules are creating excitement and anxiety.

“Everyone is afraid, wary – and hopeful,” said Casey O’Neill, a medical marijuana grower in Mendocino County who cultivates 25 cannabis plants under county guidelines. “It does feel like a new era. We are now farmers. We are no longer criminals.”

Small outdoor cannabis growers such as O’Neill, with 50 plants or fewer and no more than 5,000 square feet of cultivation space, will be at the lowest tier of California’s licensing structure. State rules will allow for outdoor pot nurseries of up to an acre and indoor production of half an acre.

O’Neill said some small farmers are worried about being squeezed out by bigger players in a California market “on a fast track to conglomeration.” Under the new regulations, the Department of Agriculture is expected to set limits on the number of licenses for larger pot-cultivation ventures.

In Humboldt County, where marijuana fuels the economy, local advocates are debating strategies to retain market share as a state-regulated medical marijuana trade – and potentially expanded legalization – are expected to spur competition across California.

“What is going to carry Humboldt County through the day is that we grow the best cannabis in the world,” said Andy Powell of California Cannabis Voice Humboldt, an advocacy group for local growers. “It’s a question of how we protect it. Can we brand it? Can we maintain control of farms that are growing craft or boutique cannabis?

“We want to grow the fine wine, whereas Fresno is welcome to the two-buck chuck.”

‘A clear and certain signal’

So far, the Central Valley, California’s most renowned agricultural region, has been mostly hostile to the notion of commercial cannabis production. Medical marijuana cultivation is banned in unincorporated Fresno County, and the city of Fresno allows only four-plant indoor grows for medical marijuana users.

According to Americans for Safe Access, a medical marijuana advocacy group, 193 California cities and 20 counties, including Sacramento County, ban cannabis stores or commercial cultivation. But other jurisdictions, enticed by the prospects of local tax revenues, are expected to welcome pot business expansion.

Oakland may be at the top of the list. That city in 2010 set out to become the Silicon Valley of weed with an ambitious plan to license four indoor marijuana farms, each with up to 100,000 square feet. Oakland expected to reap a tax bonanza from the project under a voter-approved 5 percent local levy on medical cannabis sales.

The city’s plan riled the U.S. Department of Justice, which in 2011 launched sweeping raids on California cannabis businesses. The federal actions included a still-pending 2012 civil suit that seeks to shutter the Harborside Health Center dispensary. Harborside and Oakland officials argue that California’s new medical cannabis regulations are grounds for the Justice Department to drop the suit.

In 2013, after Colorado and Washington legalized recreational marijuana use, Deputy Attorney General James Cole issued a memo saying the Justice Department wouldn’t intervene in states legalizing pot if those states enacted “robust controls” regulating marijuana sales and distribution.

Federal authorities said they want safeguards against marijuana sales to minors and illegal pot diversions into criminal markets and to states where marijuana use remains illegal.

In his signing statement, Brown said California’s new regulations send “a clear and certain signal to our federal counterparts that California is implementing robust controls not only on paper, but in practice.”

Medical cannabis lawyer Figueroa said the state’s regulatory framework is “just the scaffolding on the house and there are rules to be worked out.” He said there likely will be a lot of “lobbying and sausage-making” in follow-up legislation.

“Now we have 100 years of implementation to do in two years,” said Hezakiah Allen, a former medical marijuana farmer from Humboldt County who heads the Emerald Growers Association lobbying group.

“I don’t know of a lot of people who are saying, ‘Hooray, we get to do a bunch of paperwork now,’” he added. “But this marks the beginning of the inspections-not-raids era. ... A lot of (marijuana) business owners are ready to be legitimate and fully participating members in their local economies.”